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Kimberly Amadeo

Is Concern Over the Budget Deficit Just a Scare Story?

By February 24, 2010

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The Center for Economic and Policy Research recently released "The Budget Deficit Scare Story and the Great Recession" in which it states that concerns about the $1.3 trillion deficit are just "a well-funded public relations campaign (that) has managed to largely push the economic crisis to the back burner." The Center argues that the surge in the deficit in the last two years is a result of lower tax revenues and necessary stimulus spending, both a result of the recession. The Center also correctly notes that the deficit increase over the next decade is a result of higher defense spending and mandatory Medicare costs. These are both reasons to continue to be concerned about the budget deficit, as I have been warning for the last three years.

What It Means to You

To really drive an economic recovery, the budget should focus more on helping small businesses, reducing foreclosures and removing toxic debt so banks can lend again.

To really hack away at government spending, two areas must be reduced: defense-related security ($895 billion), Medicare ($491 billion) and Medicaid ($297 billion). Despite the press, stimulus spending is not the lions' share, at only $136 billion. However, now that the economy is getting back on its feet, is it even necessary?

President Obama's $3.8 trillion budget for FY 2011 will create an unnecessary deficit of $1.4 trillion that will ultimately drag the economy. Deficit spending of $1.4 trillion in FY 2009 and $1.6 trillion in FY 2010 was needed to boost the economy. But Fiscal Year 2011 doesn't start until October 2010. Most economists agree that the economy will be out of serious danger by then, and some even think the Fed might raise interest rates.

By adding to the staggering $12 trillion debt, it could actually put a drag on the economy, especially in the long term. That's because it acts like a tax on future generations.

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Comments

March 2, 2010 at 2:15 pm
(1) Jim Wygand says:

Kimberly,
I reviewed the article and found it hard to believe that the authors could claim that a deficit of 86% of GDP is a mere trifle. No doubt the deficit is “manageable” as is ANY deficit – it’s just a matter of time, access to borrowings, and appropriate policies. But THAT is not the issue. A deficit, no matter what the reason for its existence, is a claim against the production of future generations to sustain the consumption of the present one. If the next generation of producers is less productive than the present one the burden is huge. Unless of course, the next generation further burdens the one that will follow it! With manufacturing no longer a mainstay of the US economy how is the next generation to make enough “stuff” to pay the bill we leave them? I will even grant that we did not have much choice in creating the current deficit. The alternative was worse, but to say that those who oppose it are arguing about “trifles” is, in itself trifling. As for Congress, the paper seems to imply that it is diligently concentrating on the measures necessary to resolve the deficit issue. OK – let’s consider just one example: a federal allocation to build museums to honor the “common culture” of residents of Alaska, Hawaii, and the residents and children of the State of Massachusetts? The only “culture” they have in common is “whaling” which is really not a leading-edge sector in the US economy any more. And then what about including the Choctaw Indians of Mississippi in the museum grant program? I’m not familiar with any whaling industry owned or carried out by Choctaw Indians in Mississippi! That’s just one item from the 2009 federal budget. That kind of pork is totally irresponsible and flies in the face of any rational person. I would love to know how that particular pork helps to keep the budget in line! And who or what does the Speaker of the House haul around in that very huge jet? The problem is that such items are more important to those who want to keep them in the budget than to those who want to take them out. It’s like “deficit by a thousand cuts”, no one of which is large enough to make a difference but when summed, place a huge burden on the deficit. So I am not so sanguine about the issue of Congressional dysfunction either. A deficit is nothing except a mortgage – a mortgage on future output. Can we affort it? I’m not so sure!

March 2, 2010 at 2:18 pm
(2) Jim Wygand says:

Correction please: I meant to write a DEBT of 86% of GDP, not DEFICIT. Thanks.

March 2, 2010 at 4:29 pm
(3) Kimberly Amadeo says:

Hi Jim,

Japan thought a debt level of 120% of GDP was no big deal, and they were only just getting out of their recession before they were pushed back into it again.

I hope voters start to understand the debt problem, and start holding legislators to task for it. As long as legislators are re-elected for spending money, they will keep doing it.

Kimberly

March 2, 2010 at 6:33 pm
(4) Robert Gentz says:

If balancing the budget and paying down the debt is a good idea now, why was it abandoned? The only time there has been a balanced budget was in FY 1999 and FY 2000 with a Democratic President and a Republican Congress, the same Congress that Bush inherited. So much for Reaganomics for 20 of the last 28 years.

March 2, 2010 at 8:06 pm
(5) Jim Wygand says:

Robert,
I think the answer lies with Mark Twain’s observation that the United States Congress is the best that money can buy!

March 3, 2010 at 1:13 pm
(6) Kimberly Amadeo says:

It was abandoned to finance the War on Terror and the Bush tax cuts. The War on Terror added around $500 billion to $600 billion to the deficit each year beetween FY 2006 – FY 2008. For more see Military Budget.

Kimberly

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